United States Court of Appeals For the Ninth Circuit

No. 10203

IN THE G
UNITED STATES
CIRCUIT COURT OF APPEALS

For the Ninth Circuit

APARTMENT OPERATORS ASSOCIATION,

a corporation, Petitioner,
VS.

COMMISSIONER OF INTERNAL REVENUE,
Respondent.

PETITIONER’S OPENING BRIEF UPON PETI-
TION TO REVIEW DECISION OF THE
BOARD OF TAX APPEALS.

FILED

Epwarps MERGES,
' NOV - 21942 Jostax THomas, and

PAUL P. O'BRIEMPARENCE L. Grrr,
cae cUrRK Attorneys for Petitioner.

No. 10203

IN THE
UNITED STATES
CIRCUIT COURT OF APPEALS

For the Ninth Circuit

APARTMENT OPERATORS ASSOCIATION,

a corporation, Petitioner,
Vs.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

PE TIONER’S OPENING BRIEF UPON PHYTI-
TION TO REVIEW DECISION OF THE
BOARD OF TAX APP Ads.

Kpwarps MERGES,

JOSIAH THOMAS, and

CLARENCE J. GER,
Attorneys for Petitioner.

SUBJECT INDEX

Page
TIC TRIES DICE) ter cet ot eee Coenen ae 1
STATEMENT OF THE ISSUES.....ac...ee ee D
SHADEMIEN DOF FACTS c.ccunsc. han elene Be naeees 3
SPECIFICATION OF ERRORS TO BE URGED...see-ss-ssssssssssccccceeeeee 8
SUMMARY OF ARGUMENT .ouuscsscccscssccsccscccccccssssscsescsneeeecesssescseees 8
PUCUNUEN te etude ces ald ee ee 9

A. Petitioner Was Organized as a Non Profit Business League,
Without Capital Stock, and No Part of Net Earnings inured
fo any Private Shareliolder or Individnaly 9

B. The Publication and Distribution of a Trade Journal, and
Occasional Purchase and Sale of Merchandise, Was Merely
Incidental and the Corporation in Fact Made No Profit............ 113)

ONT STON ages coscon ats ce 2 21

TABLI OF CASES

Page

Crooks v. Kansas City Hay Dealers Association.

SHS (2ioy) oie eae ne eee eee EO +f Re Pe
Inland Empire Rural Electrification. Inc., \. Department of

Publie Service, 199 Wash. 527; 92 Pac. (2d) 258..........00.0..0.000.. ite
King County Insurance Association v. Commissioner of Internal

[Rare Das Se UE 8, 2 at np aE 16
Lederer v. Cadwalader, 274 Fed. 753................. ea ot) 15
Seritccw@lubrvenvmitectemo Ped. (2d) 9...ccc.-.cc.ccceceecesperceceersecesssse 14
State ex rel. Silver Lake R. & L. Co. v. Public Service

Gommicsions ll, Wash. 453; 201 Pac. 765.......2c.cccneee 19

Terminal Taxicab Company v. Kutz, 241 U. S. 252;

E() Ths, Veils’ CERNE BAGS OF i 51 5s eee eee ro ea nee enn a 19
Trinidad v. Sagrada Orden, 265 U. S. 578;

GE Meg Wels BUS Re EB 057210 2 Uo epee ye eon ner eree eee 16
U. S. v. Brooklyn Terminal, 249 U. S. 296;

OS oe EBL OMB ee SUSY Ser ors Oy A: ern re aes el aoe meee eeere ree te 20
Waynesboro Manufacturers’ Association. 1 B. T. A. 911................---- 15
esac ActrolmlO%s, Sec mlONM( 2) .....cscf.1 cc ceeetsc3-.oiasc see reece ee 1
Rocca AM Le LOPS at" a (est ae aera egie revinenErnEE Or. 1
Revanne Actot 1938. Secs. V4ivand 142) 18.C.......2.. cece 2
Remington’s Revised Statutes of Washington, Sec. 3888..............-..... 3

Remington’s Revised Statutes of Washington, Sec. 3693.............--..--- 11

No. 10203

IN THE
— UNITED STATES
CIRCUIT COURT OF APPEALS

For the Ninth Circuit

APARTMENT OPERATORS ASSOCIATION,

a corporation, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

PETITIONER’S OPENING BRIEF UPON PETI-
TION TO REVIEW DECISION OF THE
BOARD OF TAX APPEALS.

JURISDICTION

This is a proceeding to review a decision of the
United States Board of Tax Appeals (46 B. T. A. No.
31) determining that the petitioner is not exempt under
the Revenue Act of 1938, See. 101 (7), and that it is
accordingly liable for income and excess profits taxes
for the year 1938.

From respondents determination of proposed defi-
ciency, an appeal was taken to the Board of Tax Ap-
peals under See. 272 (a) (1) I.R.C.

2

Petitioner is a corporation duly organized and ex-
isting under and by virtue of the laws of the State of
Washington, with its principal office in Seattle, Wash-
ington, and filed its income tax return for the year 1958
with the collector of Internal Revenue at Tacoma,
Washington, withim this Cireuit. The decision of the
Board was entered January 30, 1942, (Tr. 104-105).
This petition for review was filed April 23, 1942 (Tr.
108). This Court has jurisdiction under Sections 1141
and 114271. RK. C.

STATEMENT OF THE ISSUES
The petitioner presents the following questions of
law arising upon the facts as found by the Board of

Tax Appeals, or established by the record:

1. Is the petitioner exempt from income tax
by virtue of Sec. 101 (7) of the Revenue Act of
1938, which exempts from taxation business leagues

. not organized for profit, and no part of the
net earnings of which inures to the benefit of any
private shareholder or individual?

2. Altho organized as a non profit business
league, does the purchase and sale to its members
of merchandise, and the pubheation and distribu-
tion to its members of a trade journal, change the
corporation to a profit organization ?

3. Are dues paid by members to defray ex-
penses of a business league, income within the
meaning of the Internal Revenue Statute?

3

STATEMENT OF FACTS
The petitioner is a non profit organization formed
under Section 3888 and subsequent sections of Rem-
ington’s Revised Statutes of Washington relating to
corporations not formed for profit, (Tr. 12). Its ar-
ticles of incorporation (Tr. 48-54) define its objects
and purposes as follows:

‘‘The objects and purposes for which this cor-
poration are formed are as follows:

‘‘(a) To provide a mutual benefit organization
not operated for profit, for the purpose of gather-
ing and distributing facts, data, and information
relative to the ownership, operation, and general
conduct of apartment houses and the apartment
house business in general, for the use and benefits
of its members and for public dissemination.

‘‘(b) To provide a meeting place, office and
other facilities which are deemed necessary or de-
sirable in the handling of its affairs and for use
and benefit of its members.

‘‘(e) To handle goods, wares and merchandise
required by its members, and to render service
and counsel, and assistance to its members, and
generally to assist them in control of their finan-
cial and economic interests and stabilization of the
industry.

‘*(d) To own, operate, publish, manage and dis-
tribute any publication deemed advisable, and par-
ticularly the magazine known as the ‘APARTMENT
JOURNAL’ in accordance with the law governing
such publications, and in connection therewith to
employ agents to conduct and handle the same, sell
advertising space therein, and to do all things
deemed necessary or expedient in connection there-
with.

‘‘(e) To encourage and assist in the organiza-
tion of apartment house owners and operators in
the State of Washington.”’

4

The articles also define in part the powers, rights
and privileges of said corporation under the laws of
its Incorporation as follows:

(j) To establish, acenmulate, and operate a
surplus fund from any of its operations, inelud-
ing: Members’ fees, charges and dues; and ser-
vices rendered members and supphes purchased
and handled for its members; and to distribute
such fund to members in accordance with the pro-
visions of its By-laws.

The tria] Examiner in his findings of fact (Tr. 101-
103), after setting out the foregoing quotations, in-
cluding several others, says:

‘* Petitioner exercised substantially all the fore-
going functions. It acted as a clearing house for
information about tenants, about the operation of
apartment houses, and about legislation affecting
the business; it gave counsel and advice, and did
what it could to promote the common welfare of
the members. On its own machine, it printed spe-
cially designed forms, such as rent receipts and
rental agreements for use in its locality and sold
them to members at cost, plus a small margin, the
price being less than a member would ordinarily
pay if he were independently to have the forms
printed. It gets information about prices and buys
articles, such as electrie¢ light bulbs and other clec-
trical equipment, for its members in larger quan-
tities and at lower unit prices than they would
ordinarily pay, and sells them to the members at
prices slightly above cost. In 1938 it bought at a
36 per ceit discount and sold to its members at 32
percent discount. The price does not melude any
portion of overhead expenses, such expenses, as
for rent, furniture, equipment, and salaries, beme
paid entirely out of dues. In 1938 it published a
journal and distributed it among its members. By
this means it dissemimated information more in-
expensively than by letter or pamphlet. The jour-
nal carried advertising of supply houses, light and

)

power, and telephone companies; it did not pay for
itself, and was discontinued in 1939. It represents
members in labor disputes, and negotiations and
hearings are held in its rooms.

‘‘Petitioner has no purpose or intention of
making a profit, but it tries to have a small surplus
to assure its continuance. It maintains a general
fund comprising all its receipts, including dues
and sales and advertising receipts, and from it
payment is made of all expenses, such as salaries
and equipment. In 1938 the fund grew and then
remained stationary.

‘‘ As shown by its 1938 return, petitioner’s gross
receipts were $10,814.17, comprised of dues $6,943,
journal $2,519.09, and merchandise sales $1,352.08 ;
and its expenses were $9,873.08, comprised of gen-
eral expense $3,641.96, journal $4,604.96, and mer-
chandise purchases and expenses $1,626.16.”’

The records of the corporation were analyzed dur-
ing the proceedings, before the Trial Examiner, after

counsel for respondent claimed:

‘‘Tt is the position of the respondent that the
petitioner is engaged in business and in the type
of business normally carried on for profit.

‘*I think the evidence will show that it bought
and sold merchandise at a profit; that it published
a journal and accepted advertising in that publi-
eation.

‘Now those are operations that are normally
carried on at a profit. They claim a deficiency its
that basis.’’ (Tr. 17).

The details of the purposes and operations of the
petitioner corporation are found in the testimony of
Harry T. Williams (Tr. pp 11-30). These details great-

ly abbreviated are:

6

Petitioner incorporated as a non-profit organiza-
tion; gathered and disseminated information relative
to apartment house business, studied legislation, pre-
pared reports of tenants, printed forms peculiar to
apartment house operation, aided members in pur-
chasing supplies from dealers, and from time to tinie
published a journal for members, and acquired a sur-
plus fund to act as a ‘‘cushion”’ sufficient to cover oper-

ating expenses for a period not to exceed four months.

E. J. Miner, a certified public accountant, prepared
an audit and report of petitioner’s business for the
year 1938. This report is set forth in petitioner's Iix-
hibit) No. 2, Gir. 76-62). Mxiibit 1 of this report (Tr.
80) is a summary of receipts and disbursements :

“TRAIT BIT 1
Apartment Operator’s Association
Cash Receipts and Disbursements

Year Ended December 31, 1938.

Cash Balance, January 1, 19388........ $1,209.06
Cash Receipts:
Membership Wyes <2. .....-....4.....- $6,943.00
Momma Ads ertiicina | -............- 2,919.09
Cash sales of Simpoliies: .....-............. 733.33 V Sales
Collection on Supply Accounts
IRCCCIVEMDLG 227 cee eee ee. 618.75 10,814.17
12,023.23
Cash Disbursed—Exhibit 2.............- 10,456.82
Cash on Hand and in Bank,
e@emiberrol,, Waseees.-2---..g2c 1,565.41

(Pencil Notation) 1,209.06
(Pencil Notation) — 356.35

7

Note: There was also Cash in Bank in the amount
of $241.00 representing Legislative Fund Assessments
collected. During January 1939 a separate bank ac-
count was opened for this fund.

Exhibit 2 of this report gives the details of dis-
bursements totaling $10,457.82, and further arranges
departmental operations showing a surplus from dues
of $1,868.66, and a loss from the journal publication of
$899.33, and a loss on the sale of merchandise of
+612.98, leaving a net income per books of $356.35. (Tr.
80-81).

The surplus fund on January 1, 1938, amounting to
$1,209.06 and on December 31, 1938, amounting to
$1,565.41 (Tr. 80), was never distributed according to
the testimony of Harry T. Williams, on redirect ex-
amination (Tr. 24).

‘‘@. And has any of this general fund ever
been distributed to anyone?
A. No sir.”’

The only two items which respondent claimed con-
stituted profit are referred to in the findings of fact,
and are summarized in the last six lines thereof as fol-

lows:
‘Journal receipts $2,519.09 ;

Journal expenses $4,604.96 ;
Merchandise sales, $1,352.08;

Merchandise purchases and
expenses, $1,626.16.’’

8
SPECIFICATIONS OF ERRORS TO BE URGED

Petitioner assigns the following errors by the Board
in its decision:
1. Failure to hold that petitioner is exempt as a

business league under the Revenue Act of 1938 Sec.
TO Oe

2. Failure to hold that the petitioner is not engaged
in a business ordinarily carried on for profit.

3. Failure to hold that the petitioner’s purchase of
supplies and re-sale to its members is incidental to the
main purpose of its existence.

4. Failure to hold that the petitioner is an organi-
gation where the members have a common business 1-
terest organized primarily to advance and protect the
business interests of its members, and that it is not
a cooperative buying organization.

SUMMARY OF THE ARGUMENT

The facts support the findings of fact by the Trial
Examiner, that petitioner was organized as a non profit
business league. The undisputed facts disclose that
petitioner committed no act to change its status to a
profit corporation,—in fact, it meticulously carried out
its original purposes, and was thus entitled to its ex-
emptions under See. 101 (7) of the Revenue Act. The
corporation, in fact, made no profit in 1938, and mem-

hership dues are not taxable income.

9

a ARGUMENT
A.
Petitioner was organized as a non profit business
league, without capital stock, and no part of net earn-

ings inured to any private shareholder or individual.

The Board erred in holding that petitioner was not
exempt as a business league within the meaning of the
Revenue Act of 1938. The record, we contend, clearly
shows that petitioner is a business league not organized
for profit and that no part of its net earnings have ever
inured to the benefit of any member, and furthermore,
there is no intention that that will ever inure in the

future for that purpose.

See. 101 (7) of said Revenue Act reads as follows:

‘‘Business leagues, chambers of commerce, real
estate boards, or boards of trade, not organized for
profit, and no part of the net earnings of which
inures to the benefit of any private shareholder or
individual.’’

A Washington corporation organized under the non
profit statute is a business league within the meaning

of said section.

If the purpose to engage in such a business is only
incident or subordinate to the main or principal pur-
pose required by statute, the exemption cannot be de-
nied on the ground that the purpose is to engage in
such a business. In the cases cited by the member of
the Board of Tax Appeals, in his opinion in support of
his decision, the purpose to engage in a regular busi-

10

ness of a kind ordinarily carried on for profit was not
incidental to the purpose required by statute.

In determining whether a purpose to engage in a
regular business of a kind ordinarily carried on for
profit is merely incidental or subordinate, each case
must stand on its own facts, and no rigid rules may

be established as a gauge.

To entitle a business league to exemption, two con-
junctive requirements must be met (1). it must not
be organized for profit, and (2), no part of its net
earnings must inure to the benefit of any private share
holder or individual. If it fails to meet both of these
tests, it is not exempt. If it meets them, it is exempt.

Petitioner was organized as a non profit corpora-
tion under the Statutes of the State of Washington
and so found by the trial examiner. (Tr. 102-103). The
pertinent sections of such statute provide:

‘See. 3888 Purpose. Corporations may he
formed under the provisions of this chapter for
any lawful purpose except the carrying on a busi-
ness, trade, avocation or profession for profit.’’

Under the laws of Washington, the petitioner is
in good standing and is functioning according to its
Article By-laws and statutes. The corporate set wp
is exactly in line with the statute. It logically follows
that unless the petitioner violates the very statute
which breathes life into it, if cannot engage in a profit
making enterprise, nor distribute any net earnings to

its members. There is no evidence of such violation,—

Jil

in fact, the record shows that the petitioner has not
in any way violated the statute under which it is
formed. The statute specifically contemplates the fur-
nishing of supplies to members of non profit corpora-
tions. Section 3893 of said code says in part:

‘The corporation may by its by-laws provide
.... the charges which may be made for services
rendered or supplies furnished the members of the
corporation by it... .”’

The statute also contemplates snch things as a sur-
plus fund and the publication of a journal. Section
3893 continues to list functions of non profit corpora-
tions that may be provided for as follows:

‘« ,..the formation of a surplus fund and the
manner and proportions in whieh such surplus
funds shall be distributed, either upon the order of
the corporation or upon its dissolution, and gen-
erally all such other matters as may be proper to
earry out the purpose for which the corporation
was formed.’’

There is absolutely no evidence that the petitioner
was formed for profit or that it has ever distributed
either money or goods as dividends among its members.
It is clear from the testimony that the petitioner was
only a group of apartment operators banded together
for the sole purpose of assisting each other to more
efficiently operate their buildings. The amount of
goods (mostly receipt books and electrie light globes)
purchased by the petitioner and sold to its members
at a slight mark-up, is so small that such purchase and
distribution is merely incidental or subordinate to the

12

purposes permitted by statute. The Journal is clearly
the most practical and economical way of disseminat-
ing information regarding apartment operation amoung
the members, and the acceptance of advertising to
help defray the expense of publication is merely the
means of making the dissemination of information as
economical as possible.

The respondent contended that the services im the
‘ase at bar showed that the petitioner was engaged in
business for profit and was accordingly barred from
exemption and the Board of Tax Appeals sustained
him in his contention. This position is, however, not
sustained by the evidence, the Findings of Fact. or by
the conclusions drawn from the findings of fact. .A
Washington Corporation organized under the non
profit statute, is a business league within the meaning
of See. 101 (7) of the Revenue Act, where no part of
the net earnings inures to the benefit of any private
shareholder or individual. This position we believe
is fully sustained by the authorities dealing with the
subject.

Crooks v. Kansas City Hay Dealers Assoeia-
tion, 37 Fed. (2d) 83

was brought to recover from the Collector of Internal
Revenue income tax, for which rebate had heen re-
fused. The trial court allowed recovery, and the Col-
lector appealed. In affirming the trial court the Appel-
late Court said:

‘“Was the association organized for profit? The
by-laws provide certain charges for specific serviees

13

to be performed for the members such as weighing,
plugging, and watching cars of hay. Provision is
made for the sale of loose hay that may he on the
tracks. All of these collections go into a general
fund. Out of these things, including assessment of
some fines, the association in 1924 had a net profit
of $3,211.48, which included an item of interest
from bank deposits, and an invested return sur-
plus of some $1,000.00, which it had at that time ac-
eumulated. Upon these facts appellant builds its
argument that the association is organized for
profit.

‘It is unquestioned that the fees received from
weighing, plugging and watching services have in
some years produced a profit to the association,
while in other vears there has been a deficit ....
the more fact that an association of this character
may receive some income and arrange that income
so as to carry on its work is no proof that it is or-
ganized for the sake of profit.

‘*It has been the experience of the association
that the fees realized from these services exceeded
the costs of the service, and the surplus over and
above the amount actually expended to maintain
the service, went into the general fund of the as-
sociation, and was used wholly in furtherance of
the objects and purposes thereof, and no part of
said fund has inured to the benefit of any member
of the association, or any other individual, but
such fund must be used solely and exclusively in
furtherance of the objects of the association in ac-
cordance with its constitution and by laws. In the
examination of the Articles of Incorporation and
by-laws of the Association, nothing can be found
to substantiate any theory that this organization
was organized and conducted for profit.”

ez

The publication and distribution of a trade journal,
and occasional purchase and sale of merchandise, was
merely incidental and the corporation in fact made no

profit.

14

Santee Club uv. White, Former Collector of In-

ternal Revenue, 87 Fed. (2d) 5

was an action brought to recover income taxes assessed
and paid under the Revenue Act. The Santee Club was
organized under the Membership Corporation Law of
New York, which was not applicable to corporations,
‘organized for pecuniary profit.’’ One of the objects
of the corporation, as set forth in its constitution was:
‘*To raise such plantation, farm and garden products
wpon real estate owned by the club, as the club may
desire, and to sell or otherwise dispose of the same.”’
In the opinion of the Appellate Court affirming the
lower court, which allowed recovery, is the following
language:

‘“The exemptions are accorded to specific cor-
porations, not to specified transactions .... In
order to be within the exemptions it must appear,
as the District Judge said, that the club in ques-
tion was (1) organized exclusively for pleasure,
recreation and other non-profitable purposes; (2)
that it had been operated exclusively for such pur-
pose; and (3) that no part of its net earnings
mured to the benefit of its shareholders. . .

“We think it clear that considering the pro-
visions of the Certificate of Incorporation, and of
the constitution of the club, in connection with the
Statute under which the club was organized. it
is clearly apparent that the club was organized
for non profitable purposes. The last clause in the
3d object ‘and to sell or otherwise dispose of the
same,’ which is relied on by the Government, re-
fers, we think, to a disposal of surplus products,
not to a purpose of engaging in the business of
‘aising prodnets in a commercial way.”

15

As the the sale of the real estate, the Court held it
was incidental to the general purposes of the club,
citing in support of its position, Lederer v. Cadwala-
der, 274 Fed. 753, as follows:

‘*A single, isolated activity .... does not con-
stitute a trade, business, profession, or vocation.”’

In appeal of Waynesboro Manufacturers’ As-
sociation, 1 B.T.A. 911

the taxpayer claimed exemption from tax under the
Revenue Act of 1918, as a ‘‘business league... . not
organized for profit, and no part of the net earnings
of which inures to the benefit of any private stock-
holder or individual.’’ The taxpayer was an unincor-
porated association. In its constitution is the follow-
ing provision:

‘‘This association shall not be conducted for
profit, but shall be maintained by fees, subscrip-
tions and savings effected by collective buying ; pro-
vided that when a working capital of $25,000.00
is accumulated, these fees, etc., shall be reduced so
that they shall cover only the running expenses of
the association.’’

In that case, according to the opinion, both parties
agreed the taxpayer was a business league, but they did
not agree it was one not organized for profit, and no
part of the net earnings of which inures to the benefit
of any private stockholder or individual, and therefore
exempt by the statute. The opinion was written by
Honorable John M. Sternhagen, one of the members
of the U. S. Board of Tax Appeals, and the member
before whom the case at bar was tried, and from whose

judgment this appeal was taken.

16

After eiting and quoting from Trinidad v. Sagrada
Orden, 263 U. S. 578, 68 L. Ed. 458; 44 8. C.L -204,
the trial tribunal reversed the Commissioner, saying:

‘Looking at the constitution of the tax payer,
it appears not alone from its affirmative statements
of purposes and objects, but by an expressed in-
hibition that it ‘shall not be conducted for profit.’
It may acquire a working capital of $25,000.00, but
this is not the avowed purpose of its creation. Such
working capital is only for the purpose of enabling
it to fulfill its non profit functions. And the evi-
dence does not contain any facts which would in-
dicate that actually the association was conducted
for profit. It had earnings, but the Supreme Court
in the Trinidad case clearly said that Congress
contemplated this, and that net income does not
take the organization out of the Statute. We think
the tax paver is a business league not organized
LOLMROML. . .\--

‘““The second question is as to the destination
of the mcome—whether any part inures to the
benefit of any private individual. This is a ques-
tion of fact to be determined upon evidence... .
Here, however, the Commissioner agrees that the
taxpayer retained for its own use its earnings. No
part thereof inured to the benefit of any indi-
vidual. Thus the statutory qualifications are fullv
met.”’

We quote from the sylabus in King County In-
surance Association, petitioner v. Commissioner of In-
lernal Revenue, respondent, 37 B. T. A. 288
which sets forth the facts therein succintly :

‘*Petitioner is a ‘trade assoelation,’ organized
under the laws of the State of Washington, as a
non profit organization. Its membership is com-
posed of agents of various insurance compales
writing fire and Jiability insurance in King County,
Washington. In order to meet a part of overhead

17

expenses, the members turn over to the association
the business of writing policies upon the Port of
Seattle, Seattle School] District, and King County
Hospital, and the Olympic Hotel, which was con-
structed upon state lands. The dues of the mem-
bers were thereby reduced. Held, that the peti-
tioner is a business league, exempt from income
tax, under Sec. 103 (7) of the Revenne Acts 1928
anda lean

This proceeding was brought before the Board of
‘'ax Appeals for the redetermination of deficiencies
and penalties for delinquency in filing returns. The
first question presented therein was whether or not
the petitioner was a business league, exempt from in-
come tax.

In its opinion, the Board said:

‘There can be no question but that the peti-
tioner qualifies as a business league, exempt from
income tax for 1931 and 1933, the taxable years
involved in this proceeding, unless it is barred
from such exemption by reason of the fact that
it acted as agent in writing insurance policies on
so-called ‘pubhe business.’

‘‘The respondent contends that by reason of
this fact, the petitioner engaged in business for
profit, and is accordingly barred from exemption.
The evidence shows, however, that the members
waived their commissions upon this public busi-
ness in favor of the association, in order to pro-
vide additional revenue for the petitioner’s ex-
penses and because it was deemed in the public
interest that there should be no competition on
the part of the members in the writing of policies
upon municipally owned properties. The members
nevertheless were required to pay dues or ad-
vances, which were rebated only in part upon the
receipt by the Association of the commission upon
the public business.’’

18

The decision in /nland Empire Rural Electrifica-
tion, Ine., vu. Department of Public Service, 199 Wash.
927; 92 Pac. 528; sustains our contention in the case

at bar.

The Inland Empire, ete., was a corporation created
under the same statute as the petitioner herein. A
eroup of farmers incorporated it for the purpose of
acquiring electrical energy at cost and selling it to its
members. The Department of Publhe Service asserted
and exercised jurisdiction over it as though it were a
»ublie service corporation. The Supreme Court held
it was not under the jurisdiction of the Department of
Public Service, and was pursuing its activities strictly
in accordance with the act under which it has been
created. The Department contended that although cre-
ated and purporting to operate under that act, it was
in fact and law a public serviee corporation. In hold-
ing that said corporation was not under the jurisdic-
tion of the Departinent of Pubhc Service, the Court
said:

‘Respondent was orgamzed under the 1907
act and, so far as the complaint shows, it conducts
its business strietly in accordance with the privi-
leges conferred and the limitations prescribed by
that act. But more important than that is the con-
trolling factor that it has not dedicated or devoted
its facilities to pubhe use, nor has it held itself
out as serving, or ready to serve, the general public
or any part of it. It does not conduct its operations
for gain to itself, or for the profit of investing
stockholders, in the sense in which those terms are
conmonly understood. ...

19

The service, which is supplied only to members,
is at cost, since surplus receipts are returned rat-
able according to the amount of each member’s
consumption. There is complete identity of in-
terest between the corporate agency supplying the
service and the persons who are being served. It
is a league of individuals associated together in
corporate form for the sole purpose of producing
and procuring for themselves a needed service at
cost. In short, so far as the record before us in-
dicates, it is not a public service corporation.’’

A number of cases are cited by the Court in sup-
port of its decision. Terminal Taxicab Company v.
Vutz, 241 U.S. 252; 60 L. Ed. 984; 36 S. Ct.. 583; is
one of them. In that case the question to be decided
was whether or not a corporation, organized by its
charter to carry passengers and goods by automobile,
taxicab and other vehicles, but not to exercise any of
the powers of a public service corporation, was a com-
mon earrier and within the meaning of the Publie
Utility Act, and subject to the jurisdiction of the Pub-
lic Service Commission. Of the company, the Court
said:

‘‘Tt does busness in the district, and the im-
portant thing is what it does, not what its charter
says.”’

In State ex rel. Silver Lake R. & L. Co, v. Public
Service Commission, 117 Wash. 453; 201 Pac. 765; the
Court said: .

‘‘TIn our opinion, the question of the character
of the corporation is one of fact and must be de-
termined by the Courts upon the evidence presen-
ed in the record.”’

20

In U.S. v. Brooklyn Terminal, 249 U. 8. 296; 39
Sup. Ct. Rep. 283, 63 L. Ed. 613, the Court said, by
Justice Brandeis:

‘“We have merely to determine whether Con-
gress, in declaring the Hours of Service Act ap-
plicable ‘to any common carrier or carriers, their
officers, agents and employees, eng gaged in the
i ansportation of passengers and “property by
railroad,’ made its prohibitions applicable to the
terminal, and its enrployees engaged in the oper-
ations were involved. The answer to that ques-
tion does not depend upon whether its charter de-
clared it to be a common e¢arrier, nor upon whether
the State of incorporation considers it such; but
upon what it does.’’

It is noteworthy that there is absolutely no ques-
tion of good faith or intentional misstatement of fact
anywhere in these proceedings, and the Trial Examiner

in effect so found.

Reexamination of Exhibit I (Tr. 80) also fully
set out on page 6 of this brief, shows actual increase in
assets or income for 1938, $356.35, the membership dues
accounting for about two-thirds of the receipts.

It is coneeded also, and so found by the Trial Ex-
aminer, that the journal receipts amounted in round
numbers to $2500, and the Journal expense in round
ninbers $4600. Merchandise sales in round numbers,
$1350.00, and merchandise purchases and expenses,
#1625. By every rule of mathematics and reason, any
surplus must come from the membership dues. Under
what theory can these dues be treated as profit? The

answer is, obviously, they can not. They were treated

21

and should be treated merely as accumulated funds for
the purpose of carrying on the business league.

As we understand the theory of the Board of Tax
Appeals, any surplus might be distributed to members,

but the fact still remains. it was not.

CONCLUSION

For the foregoing reasons, petitioner contends that
the Board erred in determining that for purposes of
Federal Income Tax for the taxable year 1988, it was
not exempt as a business league, not organized for
profit and no part of the net earnings of which inures
to the benfit of any private shareholder or individual,
and that therefore the decision of the Board should be
reversed, with directions to allow exemption claim by
the petitioner in its return for the taxable year.

Respectfully submitted,
Epwarps MERGES,
JOSIAH THOMAS, and
CLARENCE L. GERE,
Attorneys for Petitioner.